document of the world bankdocuments1.worldbank.org/curated/en/608041560195381124/... · 2019. 8....

Document of

The World Bank FOR OFFICIAL USE ONLY

Report No: ICR00004184

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IDA-48970)

ON A

CREDIT

IN THE AMOUNT OF SDR 18.1 MILLION

(US$28.2 MILLION EQUIVALENT)

TO THE

THE REPUBLIC OF MALAWI

MINISTRY OF FINANCE, ECONOMY AND DEVELOMENT

FOR THE

MALAWI - FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT (P122616)

May 29, 2019

Finance, Competitiveness and Innovation Global Practice

Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective

Currency Unit = Malawi Kwacha (MK)

MK 726.35 = US$1 US$1 = SDR 0.71

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACH Automated Clearing House

ADR Alternative Dispute Resolution

ATM Automated Teller Machine

ATS Automated Transfer System

CAS Country Assistance Strategy

CSD Central Securities Deposit

CDS Central Depository System

CPFL Consumer Protection and Financial Literacy

DFID U.K. Department for International Development

EFT Electronic Funds Transfer

FIU Financial Intelligence Unit

FM Financial Management

FSAP Financial Sector Assessment Program

FSDT Financial Sector Deepening Trust

FSPU Financial Sector Policy Unit

FSTAP Financial Sector Technical Assistance Project

GCI Global Competitiveness Index

GDP Gross Domestic Product

GoM Government of Malawi

IFMIS Integrated Financial Management Information System

IFR Interim Financial Report

IMF International Monetary Fund

ISR Implementation Status and Results Report

M&E Monitoring and Evaluation

MFI Microfinance Institution

MGDS Malawi Growth and Development Strategy

MFSDS Malawi Financial Sector Development Strategy

MFSDT Multi-Donor Financial Sector Deepening Trust

MNO Mobile Network Operators

MOF Ministry of Finance

MSB Malawi Savings Bank

MSE Malawi Stock Exchange

MSMEs Micro, Small, and Medium Enterprises

MTR Midterm Review

M&E Monitoring and Evaluation

NBFI Non-Bank Financial Institution

NFIS National Financial Inclusion Strategy

PAD Project Appraisal Document

PDO Project Development Objective

PIU Project Implementation Unit

RBM Reserve Bank of Malawi

RTGS Real Time Gross Settlement

SACCO Savings and Credit Cooperative

STEP Systematic Tracking of Exchanges in Procurement

TOR Terms of Reference

TPH Transactional Processing Hub

TTL Task Team Leader

Vice President: Hafez Ghanem

Country Director: Bella Bird

Senior Global Practice Director: Sebastian-A Molineus

Practice Manager: Niraj Verma

Task Team Leader(s): Thilasoni Benjamin Musuku, Efrem Zephnath Chilima

ICR Main Contributor(s): Sathyanadhan Achath

TABLE OF CONTENTS

DATA SHEET ............................................................................................................................ 1

ABSTRACT ............................................................................................................................... 5

I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ............................................................. 8

A. CONTEXT AT APPRAISAL .........................................................................................................8

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ..................................... 14

II. OUTCOME ...................................................................................................................... 17

A. RELEVANCE OF PDOs ............................................................................................................ 17

B. ACHIEVEMENT OF PDOs (EFFICACY) ...................................................................................... 18

D. JUSTIFICATION OF OVERALL OUTCOME RATING .................................................................... 22

E. OTHER OUTCOMES AND IMPACTS (IF ANY) ............................................................................ 22

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ........................................ 25

A. KEY FACTORS DURING PREPARATION ................................................................................... 25

B. KEY FACTORS DURING IMPLEMENTATION ............................................................................. 27

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME ............. 28

A. QUALITY OF MONITORING AND EVALUATION (M&E) ............................................................ 28

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ..................................................... 29

C. BANK PERFORMANCE ........................................................................................................... 30

D. RISK TO DEVELOPMENT OUTCOME ....................................................................................... 31

V. LESSONS AND RECOMMENDATIONS .................................................................................. 33

ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ................................................................. 36

ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION .................................. 56

ANNEX 3. PROJECT COST BY COMPONENT ................................................................................ 58

ANNEX 4. EFFICIENCY ANALYSIS ............................................................................................... 59

ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS............... 60

ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ......................................................................... 117

ANNEX 7. SPLIT RATING CALCULATION ................................................................................... 118

ANNEX 8. MALAWI BASELINE FINANCIAL LITERACY AND CONSUMER PROTECTION HOUSEHOLD SURVEY

119

ANNEX 9. MALAWI FOLLOW-UP FINANCIAL LITERACY AND CONSUMER PROTECTION SURVEY ....... 127

The World Bank Malawi - Financial Sector Technical Assistance Project (P122616)

Page 1 of 132

DATA SHEET

BASIC INFORMATION

Product Information

Project ID Project Name

P122616 Malawi - Financial Sector Technical Assistance Project

Country Financing Instrument

Malawi Investment Project Financing

Original EA Category Revised EA Category

Not Required (C) Not Required (C)

Organizations

Borrower Implementing Agency

Ministry of Finance, Economic Planning and

Development Reserve Bank of Malawi

Project Development Objective (PDO) Original PDO

The project aims to increase access to finance for the currently unbanked, but bankable, population of Malawi.


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FINANCING

Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$)

World Bank Financing IDA-48970

28,200,000 28,200,000 26,280,042

Total 28,200,000 28,200,000 26,280,042

Non-World Bank Financing 0 0 0

Borrower/Recipient 0 0 0

Total 0 0 0

Total Project Cost 28,200,000 28,200,000 26,280,042

KEY DATES

Approval Effectiveness MTR Review Original Closing Actual Closing

24-Mar-2011 22-Dec-2011 03-Nov-2014 31-Aug-2016 29-Jun-2018

RESTRUCTURING AND/OR ADDITIONAL FINANCING

Date(s) Amount Disbursed (US$M) Key Revisions

29-Oct-2015 17.55 Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Reallocation between Disbursement Categories Change in Implementation Schedule

28-Aug-2017 25.09 Change in Results Framework Change in Loan Closing Date(s) Change in Legal Covenants Change in Implementation Schedule

KEY RATINGS

Outcome Bank Performance M&E Quality

Moderately Satisfactory Moderately Satisfactory Modest


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RATINGS OF PROJECT PERFORMANCE IN ISRs

No. Date ISR Archived DO Rating IP Rating Actual

Disbursements (US$M)

01 22-Sep-2011 Satisfactory Satisfactory .15

02 29-Jun-2012 Satisfactory Satisfactory 1.63

03 05-Jan-2013 Satisfactory Satisfactory 1.63

04 06-Jul-2013 Satisfactory Moderately Satisfactory 5.88

05 29-Dec-2013 Satisfactory Satisfactory 6.83

06 25-Jun-2014 Satisfactory Satisfactory 11.22

07 15-Jan-2015 Moderately Satisfactory Moderately Satisfactory 13.97

08 08-Sep-2015 Moderately Satisfactory Moderately Satisfactory 17.55

09 19-Feb-2016 Moderately Satisfactory Satisfactory 17.55

10 09-Sep-2016 Moderately Satisfactory Satisfactory 19.20

11 23-Apr-2017 Moderately Satisfactory Satisfactory 24.09

12 16-Mar-2018 Moderately Satisfactory Moderately Satisfactory 25.09

13 15-Jun-2018 Moderately Satisfactory Satisfactory 25.09

SECTORS AND THEMES

Sectors

Major Sector/Sector (%)

Financial Sector 100

Public Administration - Financial Sector 100

Themes

Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Private Sector Development 40

Business Enabling Environment 40

Regulation and Competition Policy 40


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Finance 55

Financial Stability 24

Financial Sector oversight and policy/banking regulation & restructuring

12

Financial Sector Integrity 12

Financial Infrastructure and Access 31

Financial inclusion 31

Public Sector Management 6

Public Administration 6

State-owned Enterprise Reform and Privatization

6

ADM STAFF

Role At Approval At ICR

Regional Vice President: Obiageli Katryn Ezekwesili Hafez M. H. Ghanem

Country Director: Olivier P. Godron Bella Deborah Mary Bird

Senior Global Practice Director: Marilou Jane D. Uy Sebastian-A Molineus

Practice Manager: Michael J. Fuchs Niraj Verma

Task Team Leader(s): Samuel Munzele Maimbo Thilasoni Benjamin Musuku, Efrem Zephnath Chilima

ICR Contributing Author: Sathyanadhan Achath


Page 5 of 132

Abstract

The Financial Sector Technical Assistance Project (FSTAP) was approved by the World Bank Board on March 24, 2011 and became effective on December 22, 2011. The project provided credit of US$28.2 million equivalent to the Government of Malawi (GoM) to pursue market-oriented reforms in its efforts to achieve sustained economic growth and meaningful poverty reduction. The Project Development Objective (PDO) was to increase access to finance for the unbanked, but bankable, population of Malawi, through a series of initiatives aimed at financial deepening and a stable financial sector that provided efficient and broad-based financial intermediation.

The success of the project initiatives is evident by the increase in the percentage of the adult population that uses formal financial institutions; increased proportion of women within the adult population that are formally banked; new financial sector regulations that are now operational; strengthened institutional capacity of regulators and supervisors, and interoperable payment switch, technology platform for MFIs and SACCOs that has been established and is now operational, and integrated card and mobile money payments capabilities.

The project was originally scheduled to close on August 31, 2016, but was extended to July 31, 2017, and yet again to June 29, 2018, to allow completion of key activities and to achieve its intended objective.

The project was restructured during which, while the PDO remained unchanged, some indicators were revised and additional PDO intermediary indicators were added during two level-2 restructurings. This was done to strengthen the results framework at Midterm Review (MTR). One project component which was designed to support the creation of a Financial Sector Deepening Trust (FSDT) which aimed to promote financial inclusion and access as well as innovation did not materialize and in part, the results framework had therefore to be modified.

The project was completed in seven years at a total cost of US$28.2 million. The project outcomes performance rating is considered ‘Moderately Satisfactory’ even though the end-line achievement rate for five out of six PDO level indicators was either above 81 percent or surpassed the target. The project mainly provided support to strengthen institutional capacity to analyze financial sector issues and develop policies and strategies relating to state owned banks, mobile money and Non-Banking Financial Institutions (NBFIs) including micro-finance institutions, upgrading of financial market infrastructure and consumer protection mechanisms which support increased access to financial services for targeted beneficiaries.

The project also provided effective lessons that may be applicable for similar operations in the sector or in other countries. Key lessons include the following:

• Readiness for execution. For the success of a project such as the FSTAP it is vital to provide high-quality technical studies to underpin key issues and considerations such as the business case for shared infrastructure and architectural design. Ensuring advance procurement of the technical consultants can also help expedite progress on activities that entail support for financial market infrastructure.


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• Reinforcing ownership through end-user involvement throughout project lifecycle. Projects such as FSTAP with a significant focus on financial market infrastructure can benefit from creating and sustaining a “shared platform”, a mechanism promoting understanding and offering practical guidance on identifying and avoiding pitfalls and maximizing payoffs. The shared platform can act as a home for the project or serve as an initiative that is unincorporated and does not have its own legal status but provides administrative support and oversight and financial responsibility for all activities of the project. These project responsibilities are additional to the PIU team’s day-to-day programs and responsibilities. The provision of a shared platform is therefore an intentional decision to extend and reinforce ownership of the technical solution by end-users and other stakeholders. The platform could support collaboration, leadership, governance and project development, providing the opportunity for the testing of new ideas. RBM working together with the PIU facilitated stakeholder consultation and engagement on all activities on financial market infrastructure and ensured that stakeholder engagement was infused into the project throughout its lifecycle as an iterative process. The goal was to gather views of key stakeholders and arrive at common positions of the future design of the technical solutions, through a participatory and inclusive process. In this context, a mapping and identification of stakeholders should be undertaken to obtain a complete picture of key sector players in the early stages of the project. Information systems supplied should only be certified completely delivered only after installation and satisfactory test running and training involving end-users. An exit strategy for the shared platform could be incorporation or formalization as a not-for-profit or commercial entity thereby increasing the opportunity for self-financing or alternative commercial financing.

• Deliberately investing in ongoing relationship building. When a project involves multiple vendors and stakeholders, it is critical that the implementation agency and PIU teams maintain good and productive relationship with all the vendors and stakeholders. The successful application of the shared platform requires a high level of maturity, honesty, transparency, and open and ongoing conversation between the vendors, stakeholders and project leadership. There is a need to have upfront conversations – including difficult conversations if necessary - on the nature of the technology solution and business model and what is required from everyone to make it work and succeed. The development and implementation of shared infrastructures such as a national switch is a complex process requiring the active involvement of all stakeholders and keenly supported by technical working groups that bring together both bank and non-bank financial sector actors that are responsible for and empowered to consider all project outputs such as technical studies, especially business function, technical and performance requirements; governance arrangements, rules, procedures and market practices and proposals for the target architecture of the infrastructure and operating business model. In this regard, PIU teams should focus on facilitating the transfer of good practices and sharing of lessons and experiences. There are formal and informal pathways that need to be established for consistent communication to continually build the relationship and identify and address issues early on.


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• Proactive problem solving with preventive actions. The Implementation agency and PIU teams should stay on top of process inputs, outputs, and other information that signal trends and acting on them before they become issues. They should also involve end-users in the definition of quality and effectiveness. This is especially critical when defining the technical specifications of the technology solutions to be acquired as well as the commissioning of technical solutions.

• Project performance indicators setting and appropriate activities. A closer logic chain between the project activities and the intended outcome should be defined, and appropriate resources need to be earmarked. The relevance of the project design should be portrayed through strong articulation of activities, and a comprehensive package of a chain of interrelated actions.

•


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I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES

A. CONTEXT AT APPRAISAL

Context

1. Despite decades of development efforts supported by significant amounts of foreign aid, Malawi had experienced weak and volatile economic growth over a sustained period and had fallen behind its peers. Malawi’s growth remains an outlier even compared with that of its geographically and demographically similar peers that were at a similar stage of development in the 1990s. Malawi’s growth had been relatively volatile, with the size of fluctuations in growth per capita remaining persistently higher than the regional average since the country’s independence. Moreover, growth had been distributed unequally, with little impact on poverty. Per capita income had improved only minimally in the five decades since Malawi’s independence, and Malawi was one of the lowest per capita incomes in the world. It was therefore not surprising that poverty increased in rural areas between 2004 and 2011. Based on a cross-country comparison for 2010, Malawi was one of the poorest countries in the world, with 77.3 percent of its population living below US$1.90 per day. Moreover, it appears that whatever growth occurred was not distributed evenly across rural and urban areas and across wealth levels: between 2004 and 2011, per capita consumption declined for more than 60 percent of the rural population while increasing for almost the entire urban population (especially for those at the higher end).

2. The business environment in Malawi was challenging. The country ranked 119 out of 134 countries in the Global Competitiveness Index (GCI) and 126 for macroeconomic stability under the GCI and also ranked low for technological readiness (126). With respect to Doing Business, the 2010 survey had ranked Malawi 132 out of 183 economies. While the country had recently achieved notable reforms in Doing Business and trading across borders, much business environment work remained to be done, particularly in financial reforms. Enterprise survey data for 2009 showed access to finance as the greatest problem among the top 10 business environment constraints

3. Immediately after the 2007-2008 FSAP, the government used the FIRST Initiative to support the immediate post-FSAP follow up activities in the areas of insurance, pensions, capital markets, and microfinance activities, including the development of regulatory and supervisory frameworks related introduced financial sector laws. FIRST support also involved the preparation and adoption of the Financial Sector Development Strategy (FSDS) for 2010– 2015. The government continued to strengthen financial sector regulation and supervision utilizing several donor sources, including an IMF/Norges Bank program which helped to define the RBM’s strategies in key areas. Additional efforts were needed for RBM to build the capacity required to meet its new responsibilities for failed bank resolution, consolidated and risk-based supervision, macro-prudential analysis, market liquidity forecasting, payments system strategy, credit bureau policy, and development of supporting regulations and implementation manuals in the context of the new financial sector laws and regulations.

4. FSTAP became effective on December 22, 2011 and was implemented by the Reserve Bank of Malawi (RBM) through a subsidiary agreement signed with the Ministry of Finance. A few months thereafter, the precipitous devaluation of the Malawi kwacha in May 2012 triggered vulnerabilities in the banking sector and a liquidity situation so serious that RBM introduced an uncollateralized borrowing window. Non-Performing Loans (NPLs) rapidly followed, rising from 6.5 percent at the end of September


Page 9 of 132

2012 to around 20 percent by December 2014. In the course of 2013, a massive public finance mismanagement scandal dubbed “cash-gate” was uncovered which involved millions of dollars of public funds being abused through fraudulent contracts through the issue of cheques to effect government payments. The prevalence of the use of cheques highlighted the need for a more robust and modern electronic funds transfer systems for government transactions and enhancing the role of the financial sector and national payments system in government payments. Again in 2013, the Cabinet resolved to divest government interest from financial institutions that government had a controlling interest. These included Malawi Savings Bank, Indebank, PRIDE and Malawi Rural Finance Corporation.

5. FSTAP was responsive to addressing the developments challenges affecting the financial sector in Malawi outlined above. The flexibility of FSTAP design enabled timely response to macro and financial sector development through third party diagnostics, encouraged government to adopt electronic funds transfer (EFT) following cash-gate, and leveraged the narrow window of opportunity offered by the government willingness to dispose of its state-owned financial institutions, and; delivered innovative interventions financial market infrastructure

Theory of Change (Results Chain)

6. In Malawi, policies and development strategies pointed out the key role of increased capacity of financial institutions to innovate and bank the unbanked and strengthened institutional capacity for financial institution regulation and supervision in bringing about the structural economic changes sought to achieve sustained economic growth and meaningful poverty reduction.

7. The project design of FSTAP was based on lesson learned from World Bank interventions in financial sector reform projects world-wide, in addition to donors’ specific experiences. Project implementation originally anticipated five years, recognizing that capacity building, dialogue and decision-making among both public and private stakeholders, drafting and implementation of new standards and regulations, and the carrying out of studies, analysis of findings, and decision-making involving follow-up take considerable coordination and time. The project deliberately adopted a focused technical design which meant that project components were not individually comprehensive in their design but formed parts of a comprehensive whole. An individual component or the project alone could not affect overall outcomes performance. As a result, development partners active in the sector came together under proposed the FSDT to support a comprehensive financial sector program, which was based on the government-endorsed Financial Sector Development Strategy (FSDS) for 2010-2015 which took a holistic approach to addressing constraints in financial sector development. See figure 1.


Page 10 of 132

Figure 1. Results Chain

Underlying Assumption: project components and FSTAP formed parts of a comprehensive Financial Sector Development Strategy 2010-2015

Component 1

• Strengthening legal and regulatory framework

• Strengthening supervisory capacity of the RBM

Component 1

• Financial Sector Regulation and Supervisory Functions improved

• Increase in the percentage of the adult population that use formal financial institutions

• Increase in the number of women formally banked

• Agency banking regulations operational

• Transactions processed by new payments systems including (a) Transactions volume and value processed by Automated Transfer System; (b) Transactions volume and value processed by National Switch; and (c) Transactions volume and value processed by MFI Hub

• Increased number of financially literate population

Activities Intermediate Outcomes Outcomes

Component 2

• Modernizing Real Time Gross Settlement System

• Designing central switch for processing payments

• Improving processing efficiency for small-value payments

• Reviewing adequacy of legal framework

Component 3

• Strengthening financial sector regulatory framework for consumer protection

• Enhancing institutional arrangements for consumer protection for financial services

• Piloting consumer awareness program

Component 2

• Financial infrastructure improved

Component 3

• Financial consumer protection and financial literacy improved

Re

sou

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s: U

S$2

8.2

mill

ion

Component 4

• Facilitating provision of long-term finance

• Strengthening Government’s capacity to formulate financing framework policies

• Developing infrastructure financing framework

• Diagnostic studies for financing challenge

Component 5

• Project Implementation Support

Component 4

• Ministry of Finance Financial Sector Policy and Governance capacity strengthened, and Framework for Finance developed

Component 5

• Implementation support provided


Page 11 of 132

Project Development Objectives (PDOs)

8. The PDO was to increase access to finance for the unbanked, but bankable, population of Malawi. The objective was designed to be measured through two indicators, as given in table 1.

Key Expected Outcomes and Outcome Indicators

Table 1. PDO Indicators and Outcomes

PDO Indicators Baseline End Target Outcome

Indicator 1: Increase in the percentage of the adult population that uses formal financial institutions

19% 40%

Indicator 2: Increase in the proportion of women within the adult population that is formally banked

17% 40%

Components

9. Component 1: Financial Sector Regulation and Supervision (Estimated cost: US$5.32 million). This component assisted the Reserve Bank of Malawi (RBM) to strengthen the national financial sector regulation and supervision framework for banking, capital markets, microfinance, and the insurance and pension industries by financing a combination of reporting, diagnostic, and capacity-building technical assistance activities.

10. Component 2: Financial Infrastructure (Estimated cost: US$13.22 million). The component assisted the RBM to update the basic infrastructure for payment services by supporting the modernization of its Real Time Gross Settlement (RTGS) system; designing and developing of an interoperable central switch for processing payments; and leveraging existing technology to improve processing efficiency for small-value payments, particularly microfinance payments, and institutional strengthening at the RBM, including a review of the adequacy of the current legal framework.

11. Component 3: Financial Consumer Protection and Financial Literacy (Estimated cost: US$3.02 million). The component supported the Government’s efforts to increase public trust in the financial sector by supporting the following activities: (a) strengthening the legal and regulatory framework for financial sector consumer protection, (b) enhancing institutional arrangements for consumer protection for all financial services, and (c) developing and piloting a consumer awareness/financial literacy program to improve participation in the financial sector.

12. Component 4: Ministry of Finance’s Financial Sector Policy and Governance Capacity and Long-term Finance (Estimated cost: US$3.39 million). The objective of this component was to strengthen the capacity of the Ministry of Finance (MOF) to (a) coordinate the analysis, formulation, implementation, and monitoring of financial sector policies and regulations and (b) oversee Government interventions in the financial sector. This component also supported the establishment of a policy framework and the legal and institutional infrastructure to facilitate the provision of long-term finance, strengthen the Government’s capacity to formulate and implement policies which support long-term financing, develop


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an infrastructure financing framework, and carry out diagnostic studies to identify short- and medium-term solutions to the long-term financing challenge in Malawi.

13. Component 5: Implementation Support (Estimated cost: US$3.26 million). This component facilitated the implementation arrangements for the project by supporting the operation of a Project Implementation Unit (PIU) at the RBM. RBM was the responsible implementing agency for the project with support from an oversight committee chaired by the MOF. The component financed PIU consultant salaries, office facilities and operating expenses. It was also supposed to support consultancy costs for administering the five-year Multi-Donor Financial Sector Deepening Trust (FSDT) to finance innovative solutions and products to promote financial access by targeted beneficiaries. The FSDT was not established.

B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE)

14. The project underwent two restructurings:1 (a) October 29, 2015 and (b) August 29, 2017.

First Restructuring (October 29, 2015)

15. Since the project became effective on December 22, 2011, it was rated Moderately Satisfactory mostly due to a number of activities lagging under Components 3 and 4 and delays encountered in procurement (especially under Component 2). As agreed during the MTR,2 the first restructuring took place on October 29, 2015. The project design (the scope, implementation arrangements or technical solutions) were considered broadly sound and appropriate throughout implementation. However, as of midterm, the Financial Sector Deepening Trust (FSDT) was not established and modifications had to be made to component fund allocations and the results framework as depicted in tables 2 and 3. It is worth underlining that some original outcome performance indicators were strongly connected to the establishment of the FSDT while others did not strictly follow the logical chain.

Table 2. Revision of Component Costs

Component Name Original Cost

(US$, millions) Revised Cost

(US$, millions)

1: Financial Sector Regulation and Supervision 5.32 5.66

2: Financial Infrastructure 13.22 13.68

3: Financial Consumer Protection and Financial Literacy 3.02 3.33

4: Ministry of Finance's Financial Sector Policy and Governance Capacity and Long-term Finance

3.39 3.09

5: Implementation Support 3.26 2.45

28.21 28.21

1 Level Two restructuring applies to project modifications that are changes other than in PDO statement or safeguard category. Also, approval is delegated by the Board to the regional management to be exercised by the country directors. 2 November 3 - December 3, 2014


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Table 3. Introduction of Additional PDO-level Indicators

Indicator Revision Baseline Value End Target Value

1. PDO Indicator 1: Increase in the percentage of the adult population that uses formal financial institutions

No change 19% 40%

2. Indicator 2: Increase in the proportion of women within the adult population that is formally banked

No change 17% 40%

3. Indicator 3: Agency banking regulations operational

New 0 Operational

4.

Indicator 4: Transactions volume (MK billion) and value processed by new payments systems (ATS, National Switch, MFI TPH)

Moved from intermediate indicator from under Component 2

Volume: 159,625 Value: 4,253

Volume: by 20% Value: by 10%

5. Indicator 5: Proportion of financially literate population

New 3.6% 4.8%

6. Indicator 6: Proportion of financially literate women in the population

New 3.4% 4.4%

Note: ATS = Automated Transfer System; TPH = Transactional Processing Hub.

Revision of Intermediate Indicators

16. Key intermediate indicators were upgraded and revised to better measure the project’s broader impact beyond financial inclusion aspects related to the FSDT. These indicators emphasized financial infrastructure and financial literacy. The following new indicators were added:

• Component 2: (a) modern financial infrastructure deployed and operational; (b) increase in number, value, and volume of point of sale; Automated Teller Machine (ATM); and mobile payments; and (c) increase in number, value, and volume of interbank point of sale and ATM transactions

• Component 3: RBM institutional capacity enhanced for consumer protection supervision

• Component 4: Approved road-map for implementation of government EFT payment program

Extension of Closing Date

17. A one-year extension was allowed from August 31, 2016, to August 31, 2017, to allow completion of key activities and fully achieve the project’s intended results.

Reallocation of Funds

18. As of MTR (December 2014), the Financial Sector Deepening Trust (FSDT) was not established. This is because the co-finance for the establishment and operation of the FSDT was annulled by the donor. The FSDT was a key design feature of the project contributing to financial inclusion aspects of the PDO.


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With this in mind, the project funds allocated to supporting FSDT activities were reallocated between components, as specified in table 4.

Table 4. Reallocation of FSDT Funds

Category of Expenditure Reallocation

Original (SDR) Revised (SDR)

Goods, consulting services, operating cost, trainings 16,910,000 18,050,000

Consultant services to enhance the RBM’s capacity in administering the Malawi FSDT

865,000 0

Project preparation funds refinancing 325,000 50,000

Total 18,100,000 18,100,000

Second Restructuring (August 29, 2017)

Table 5. Revision of PDO Indicator Targets

Original Indicator Revised Indicator

Baseline Value

End Target Value Revised Targets

1. Indicator 3 (newly added 4)

Agency banking regulations operational

0 450 450

2. Indicator 4 (moved from intermediate indicator under Component 2)

Transactions volume and value processed by new payments systems (ATS, National Switch, MFI TPH)

Volume: 159,625;

Value: 4,253



3. Indicator 5 (newly added 4)

Proportion of financially literate population

3.60% 4.80% 4.80%

6. Indicator 6 (newly added)

Proportion of financially literate women in the population

3.40% 4.40% 4.40%

Extension of Closing Date

19. A 10-month extension was provided from August 31, 2017, to June 29, 2018, to allow completion of the remaining activities and fully achieve the project’s results.

Rationale for Changes and Their Implication on the Original Theory of Change

20. The two restructurings did not have any major implications on the theory of change. This is because the package of project activities was indirectly reinforcing financial inclusion and broad-based financial intermediation by supporting the setting up new financial market infrastructure and strengthening institutional capability of the financial sector regulator and supervisor. The project was also


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assisting the NBFIs in their transition to digital strategies to drive financial inclusion through FSTAP support for the MFI technology hub. Hence the changes did not trigger modifications of the Original Theory of Change. .

II. OUTCOME

A. RELEVANCE OF PDOs

Relevance of PDO - High

21. The project was designed to support the World Bank’s Country Assistance Strategy3 (CAS) medium-term outcome of improving the business climate in Malawi, which in turn was linked to theme 1 of the Malawi Growth and Development Strategy (MGDS) of sustainable economic growth, sub-theme 2, “an enabling environment for private sector led growth.” The PDO was also relevant to the new Malawi CAS, which was approved by the World Bank Board in 2013, specifically theme 1, promoting sustainable, diversified, and inclusive growth. A CAS Performance and Learning Review4 specifically noted the importance of the project5 and how it continued “to help Malawi meet its financial inclusion targets by upgrading the national payments financial infrastructure, including the Automated Transfer System (ATS) which went live in December 2014 and National Switch which became operational in January 2015, and thereby lowering transaction costs to lower income groups.” The review also underlined the project design and the PDO, which remained relevant in the context of this review.

22. The project continued to remain relevant and flexible to accommodating the following three emerging priorities and developments: (a) in the banking sector, Basel II implementation support and provision of a resident bank supervision advisor; (b) the move toward the use of electronic funds transfers (EFTs); and (c) transaction support to look at options for Government divestiture from a number of financial institutions.

23. The regulations developed to support the implementation of new laws and the infrastructure developed under the project provided the basic building blocks to support continuous improvements in access to finance after the completion of the project.

B. ACHIEVEMENT OF PDOs (EFFICACY)

24. The overall implementation progress since effectiveness (December 2011) is considered Moderately Satisfactory because a number of directives, regulations and bills prepared under the project were still lagging behind before restructuring, as described above (paragraph 15). Nevertheless, the project achieved noteworthy achievements in its three-and-a-half years of operations up to restructuring, as described in this section.

3 Report No: 38326-MW, dated February 28, 2011 4 Malawi: Performance and Learning Review of Malawi CAS, Report No.: 95178-MW. 5 Results Area 1.2, paragraph 6, page 47 of Performance and Learning Review of Malawi CAS, Report No.: 95178-MW.


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The Banking Sector Strengthening

• Support provided to third-party bank diagnostic audits for overall health of the bank sector

• Basel II implementation supported6

• Bank supervision advisor provided for capacity building of bank supervision department

• Risk assessment conducted to access move by Government from checks to EFT and compatibility of public finance management system including Integrated Financial Management Information System (IFMIS) to ATS

• Transaction support provided to evaluate options for the Government divestiture from a number of financial institutions, resulting in the Government selling off majority stake in all financial institutions it previously controlled

• ATS developed and installed and going live in December 2014

• New interoperable National Switch procured, installed, and made operational in January 2015

Table 6. Achievements by PDO/Outcome before Restructuring

Achievements

PDO Indicators End Target Actual %

1 Increase in the percentage of adult population that use formal financial institutions

40% 33% 83%

2 Increase in the proportion of women within the adult population that is formally banked

40% 28% 70%

3 Agency banking regulations operational Not identified yet 379 n.a.

4 Transactions volume and value processed by new payments systems (RTGS, National Switch, MFI TPH)


ATS went live with all banks, Government, and Malawi Revenue Authority (MRA) onboard. ACH, CSD operational. The National Switch system went live with 6 banks on board with the ATM functionality. In 3 months, volume was at 21,019 transactions and value at MK 311,325,400.

n.a.

5 Proportion of financially literate population Not identified yet 38.7 per cent of adult

Malawians are financially n.a.

6 The Basel II Accord makes it mandatory for financial institutions to use standardized measurements for credit, market risk, and operational risk.


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Achievements

PDO Indicators End Target Actual %

literate, according to the 2018 Malawi Financial literacy and Consumer Protection Household follow-up survey

6 Proportion of financially literate women in the population

Not identified yet 39.9 per cent of females are financially literate

n.a.

Note: ACH = Automated Clearing House; CSD = Central Securities Deposit; TBD = To be decided.

Project Achievements after Restructuring

25. The restructuring helped the project make further progress by focusing on completing outstanding activities under Component 2 (Financial Infrastructure) and Component 3 (Financial Consumer Protection and Financial Literacy). As a result, during the past few years and in line with the PDO, adult Malawians have gained greater access to formal financial services. While only 17 percent of adult Malawians had access to formal financial services in 2013, this figure reached 29 percent in 2018. Key achievements after restructuring are described in the following paragraphs.

Strengthening of Financial Sector Regulation and Supervision

26. Banking supervision. The Parliament has passed a new Financial Crimes Bill (February 2017) which replaced the Money Laundering, Proceeds of Serious Crimes, and Terrorist Financing Act of 2006. In May and June 2017, dissemination workshops on the new law were conducted. Guidelines on regulations of Islamic Finance have also been developed. Also, the RBM has reviewed and finalized several directives/regulations on bank supervision for gazetting. As of the project closure date, a number of new directives and regulations had been gazetted or were in the process of being implemented (for the status as of June 2018, refer to the list in annex 10).

27. Capital markets supervision. Growth strategies, regulatory and hedging instruments, and an action plan for bond market development have been developed.

Financial Infrastructure

28. Strengthening the RTGS system - ATS and CSD. The ATS/CSD implementation has been completed and the system is now considered stabilized.

29. Capital markets development. The Automated Trading System for the Malawi Stock Exchange (MSE) went live on June 7, 2018.

30. Design, development, and implementation of a National Switch. All commercial banks in Malawi are integrated onto the National Switch (on ATMs), and five banks have been integrated on point of sale. The integration of mobile money services was approved for the switch: the use cases include Person-to-Person (P2P), Bill Pay, Cash-pull from bank account, and Cash-push to bank account.


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31. Support for an MFI Transaction Processing Hub. The hardware and the application services are ready for use. The data center at Globe Internet was selected for use and the application installed. The service-level agreements are finalized to cover three key relationships: hardware as a service (Haas) with Globe Internet, software as a service (Saas) with Fintech International, and service levels between participating financial institutions and the Hub Company. Seven MFIs/Savings and Credit Cooperatives (SACCOs) have also gone live.

32. Centralized National Pensions Database. The design of the database has been completed.

33. Government digital payments. All vendors are on the ground with user acceptance testing under way as of the project closure date. Integration implementation commenced and currently in progress. The expected changes relate to funding, payments, sweeping (domestic), rejections and resubmissions (cancellations and reversals), reconciliations, payments security, coding, and reports.

Financial Consumer Protection and Financial Literacy

34. A plan is in place to enact a standalone financial consumer protection law and implement a twin-peak model to consumer protection in Malawi. An inception report and a financial Consumer Protection Bill have been drafted. An Alternative Dispute Resolution (ADR) Bill was drafted and reviewed at the stakeholder workshop in June 2017. The financial Ombudsman Bill was drafted and reviewed by the stakeholders. Stakeholder consultative workshops on financial consumer protection directives were held. Also, a financial literacy survey was conducted, and the final report has been released.

MOF Financial Sector Policy, Governance Capacity, and Long-term Finance

35. The 2016–2020 National Financial Inclusion Strategy (NFIS) was launched in July 2017. The NFIS aims to increase percentage of adult population to 55 percent by 2020 from 33 percent in 2014. The strategy has identified six priority areas and specific approaches to increase financial inclusion: expansion of the reach of digital payments; expansion of savings, especially through savings groups; targeted finance for micro, small, and medium enterprises (MSMEs) and farmers; niche insurance opportunities to reduce vulnerability; effective consumer empowerment and education; and national coordination of financial inclusion. The Government has included a chapter on access to finance in the MGDS III and since launched the Malawi Financial Sector Development Strategy (MFSDS).

36. Regarding the PDO indicators, the following achievements were noted after restructuring:

Table 7. PDO Indicator Achievements after Restructuring

PDO Indicators

Achievements

End Target Actual %

1 Increase in % of adult population that use formal financial institutions

40% 39.7% 99.25%

2 Increase in the proportion of women within the adult population that is formally banked

40% 38.5% 96.30%

3 Agency banking regulations operational 450 468 104.00%

4 Transactions volume and value processed by new payments systems

See sub-indicators.


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PDO Indicators

Achievements

End Target Actual %

(RTGS, National Switch, MFI TPH)

4a Transactions volume and value (MK, billions) processed by ATS

Volume: 4,349,952 Value: 5,011

Volume: 21,220,986 Value: 73,415

Volume: 488% Value: 1,465%

4b Transactions volume and value (MK, billions) processed by National Switch

Volume: 5,399,428 Value: undefined

Volume: 5,390,276 Value: 83.51

Volume: 99% Value 100%

4c Transactions volume and value processed by MFI Hub

At least 5 institutions to go live by June 2018

Five NBFIs (MFI and SACCOs) are using hub software at project closure. Currently there are 19 NBFIs (9 MFIs and 10 SACCOs) on the Hub.

100%

5 Proportion of financially literate populationa

4.80 3.90 81%

6 Proportion of financially literate women in the populationa

4.80 3.60 75%

Note: a. Values are an index that ranges from 0 (illiterate) to 7 (highly literate).

Efficacy Rating before Restructuring (August 28, 2011–June 25, 2015)

37. The efficacy before restructuring is rated Modest. As described above (paragraph 15), only limited progress was achieved because a number of activities were still lagging behind. This resulted in the task team continuing to rate both the achievement of PDO and the implementation progress as Moderately Unsatisfactory.

Efficacy Rating after Restructuring (June 26, 2015–June 29, 2018)

38. The efficacy after restructuring is considered Substantial as the project almost fully achieved its

objectives. In some cases, the intended outcome far exceeded the expected targets.

C. EFFICIENCY

39. The efficiency is rated Substantial. The project has delivered tangible results. The project successfully advocated changes in the service delivery modalities which have been affected by the service providers, policy holders, and the Government. The key attributes are the following:

• Use of human resources. There was efficient use of human resources mainly based on the allocation of responsibilities according to each component, based on their mandate either according to policy, area of expertise, or comparative advantage. While there were preexisting entities before the project implementation, others were deliberately created (for example, Component 3: Consumer Protection and Financial Literacy) and given the statutory mandate to execute elements of the project as specified in the Project Appraisal Document (PAD). For the most part, the use of existing structures contributed to the cost-effectiveness of the project.


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• Timeliness. Training activities were centrally financed by the project, which served to cut overhead costs, and to a large extent the outputs were achieved on time. Digitization, which was one of the core components was also efficiently implemented, resulting in the overall improvement of speed of transactions to the mutual satisfaction of service providers and consumers.

D. JUSTIFICATION OF OVERALL OUTCOME RATING

40. The overall outcome rating is considered Moderately Satisfactory. To arrive at the overall outcome rating, the ICR has used the share of actual Credit disbursements, made before and after restructuring, to weigh the separate outcome ratings. The rating is based on (a) High rating for PDO relevance before and after restructuring, (b) Modest rating for efficacy before restructuring and Substantial rating after restructuring, (c) Modest rating for efficiency before restructuring and Substantial after restructuring, and (d) consideration of US$16.44 million disbursed before restructuring and US$8.65 million after restructuring. See annex 7 (Split Rating Calculation).

Table 8. Ratings

Split Ratings Relevance

of PDO Efficacy

Assessment Efficiency

Assessment Outcome

Before restructuring High Modest Modest Moderately Satisfactory

After restructuring High Substantial Substantial Satisfactory

Overall Outcome Rating Moderately Satisfactory

E. OTHER OUTCOMES AND IMPACTS (IF ANY)

Gender

41. The financial literacy program financed under the project contributed to increasing the proportion of women within the adult population that are formally banked. The proportion increased from 17 percent in March 2011 to 38.5 percent at completion of the project.

42. With the increased capacity and time, both banks and NBFIs will be able to serve more women and female entrepreneurs. It is likely that women who repay loans on time will also be able to receive larger loans for longer maturities over time.

Institutional Strengthening

43. The project contributed substantially in building the institutional capacity of agencies within the financial sector, as described in the following paragraphs:

RBM

• The project assisted the RBM in strengthening the regulation and supervision frameworks for banking, capital markets, microfinance, and pensions through research, diagnostic, and capacity-building technical assistance activities. It also assisted the RBM in replacing the RTGS system with an ATS. The ATS integrated functionality for RTGS, ACH, and instant funds transfers on a single platform. This enabled the RBM to operate for the first time both large-


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value and time-critical payments that are processed on a transaction-by-transaction basis: clearing and settlement of all small-value, high-volume or bulk retail payment instruments which can be processed on a batch basis or as instant funds transfers.

• The project also strengthened the legal and regulatory framework for financial consumer protection and enhanced institutional arrangements for consumer protection in all financial services. A Consumer Protection and Financial Literacy Unit has also been created.

• The unit responsible for financial literacy was created in the RBM and is functioning well. Its functions are to conduct surveillance on the financial sector, examining its vulnerability and reporting on financial risks.

• A supervisory framework has been completed at the RBM, and laws and manuals have also been prepared for this purpose. Newly recruited examiners would be guided by these manuals.

• Payments Systems Act 2016 has been established to ensure payment systems providers comply with the rules. Through this Act, the RBM is preparing e-money regulations, which would strengthen its supervision of payment systems.

• Creation of institutions such as the National Switch and MFI Hub is one of the major achievements of the project.

MOF

• The project strengthened the institutional capacity of the Financial Intelligence Unit (FIU) in (a) coordinating the formulation, implementation, and monitoring of financial sector policies and regulations and (b) overseeing the Government interventions in the overall financial sector.

• The FIU, an autonomous agency under the MOF, is now defining the Financial Crimes Act.

• The Financial Sector Policy Unit (FSPU) has also been created in the Economic Affairs Division of the MOF.

MFIs and SACCOs

• The Bill for MFIs and SACCOs on deposit guarantee scheme has been drafted, and its implementation will be done in phases. The project assisted in creating awareness to ensure that SACCOs would understand the new laws and regulations in the financial sector. All SACCOs were brought together for the growth and development strategy and each SACCO was asked to develop an action plan for membership mobilization.


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Capacity Building

44. The project contributed a lot in building capacity by organizing study tours and training programs. For example,

• Players involved in the supervision of SAACOs were given training in Kenya, the United States, and Canada;

• MSE staff visited some stock exchanges in the region, including Zimbabwe, to learn about ATS operations;

• Training programs were conducted on various topics such as supervision, MFI Hub, and deposit insurance. Even stakeholders like apex bodies have benefited from training programs;

• Workshops on new laws and directives in the financial sector were conducted for stakeholders. Market players, including MFIs and stock brokers, participated in the workshops to discuss the impact.

Mobilizing Private Sector Financing

45. Not applicable.

Poverty Reduction and Shared Prosperity

46. While a poverty/impact assessment is yet to be carried out, the project is likely to generate benefits for a much larger number of people who now have increased access to finance and others that are now considered ‘bankable’. This is expected to have wider implications for private sector growth, job creation, and poverty reduction.

47. The legal and regulatory framework has been strengthened for consumer protection and financial literacy. With financial education, farmers and other people are now aware that they need to save money for a rainy day.

48. They are also now better aware of getting financial services and how to administer financial products so that they can improve their livelihood. This new approach would contribute in poverty reduction. For example, with the strengthened SACCOs and MFIs, entrepreneurs will have easier access to credit for financing their businesses. This would lead to job creation which, in turn, would contribute to reducing poverty and gender imbalance.

Other Unintended Outcomes and Impacts

49. As the word has spread that the financial infrastructure is in place in Malawi, the RBM has started receiving queries from the United States and Europe and even from the International Association of Custodians of Securities for potential investments in Malawi. They are interested in knowing how safe and secure the securities issued by the RBM are and whether they are compliant with certain benchmarks such as insurance of securities.


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50. Because of the increased use of mobile payments from about 186,000 transactions in December 2012 to 4.5 million transactions in May 2018, access to finance has significantly improved and people are able to perform financial transactions even without going to banks. In particular, the rural population has benefited more from mobile technology.

51. In light of the new issues and developments in the cooperative societies, it has become necessary to amend and update the 2011 Financial Cooperatives Act. Further, the process to create a SACCO-specific Act is currently under way.

52. Because of the increased awareness on financial literacy created by the project, many secondary schools are incorporating the topic of financial literacy in their curriculum and teaching materials.

III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME

A. KEY FACTORS DURING PREPARATION

53. In the context of weak financial sector governance, the project preparation team recognized the implementation challenges and prepared the design with sound background analysis and comprehensive assessment of the Government’s commitment. Lessons learned from similar operations in other jurisdictions were also considered to assess potential risks and mitigation measures.

Lessons Learned during Project preparation and Reflected in the Design

54. Special attention was given to ensuring that the project design reflected both the World Bank’s experience in financial sector reform projects worldwide and donors’ specific experiences. More specifically, the project design reflected the following key lessons learned:

(a) Time needed for reforms. The project took into account that the implementation of reforms has multiple steps and takes a significant amount of time. Project implementation was therefore anticipated to take five years, recognizing that capacity building; dialogue and decision making among both public and private stakeholders; drafting and implementation of new standards and regulations; and the carrying out of studies, analysis of findings, and decisions regarding follow-up take considerable coordination and time.

(b) Focused technical design. The project deliberately adopted a focused technical design. It did not try to undertake all the financial sector reforms that were required in Malawi. Rather it focused only on those that were unlikely to attract support from other development partners.

(c) Ownership. The objectives of the project included the implementation of a series of policy, legal, and administrative reforms. Experience showed that such reforms can only be achieved if there is significant commitment by the Government to the objectives of the project and where World Bank programs work closely with the champions of reform in the Government and in collaboration with a broad range of stakeholders. It is noteworthy that the project supported the implementation of the MFSDS and thus had strong champions at the political and technical levels in both the MOF and the RBM, the key Government


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institutions in the sector. Furthermore, the project benefited from numerous consultations with the various stakeholders in the sector.

(d) Donor coordination. The project did not assume that a single intervention would affect overall financial intermediation. As a result, development partners active in the sector came together under the MFSDT to support a comprehensive financial sector program, which was based on the Government-endorsed FSDS and took a holistic approach to addressing constraints in financial sector development.

Risks and Risk Mitigation Measures

55. The World Bank task team carried out a risk analysis and identified critical risks and appropriate risk mitigation measures, as given in table 9.

56. The project implementation risk was assessed to be High Impact/Low Likelihood.

Table 9. Primary Risks during Project Implementation

Risk Risk Mitigation Measures Rating

Stakeholder risk: Local financial institutions and private sector investors might be reluctant to accept and/or there is lack of capacity to use new delivery channels of banking products and financial services to be developed/supported under the project.

During project implementation, training, workshops, and public awareness campaigns would be used to disseminate knowledge and advocate the benefits of the new delivery channels for financial deepening.

High Impact/Low Likelihood

Implementation agency risk: Staff skills and organizational knowledge of the RBM for project implementation are limited. Limited resources and lack of systems and processes that are in line with World Bank guidelines for procurement and financial management could cause delays in project implementation.

During project implementation, the RBM PIU would be supported by 4 consultants: project coordinator, procurement specialist, financial management (FM) specialist and monitoring and evaluation (M&E) specialist. Training will be provided to the RBM and MOF technical staff who would participate in the planned activities under the project.

High Impact/Low Likelihood

Adequacy of Government Commitment

57. The Government had demonstrated ownership and strong commitment in developing conditions for an improved financial sector by pursuing market-oriented reforms to achieve sustained economic development and meaningful poverty reduction. Having the financial inclusion agenda under a single umbrella which harmonized and coordinated different donor-supported reforms in the financial sector was an important step in the right direction of sustaining reforms. Also, the government pursued intense hands-on involvement in mobilizing and allocating financial resources through a number of government-led development finance institutions, notably one fully government-owned commercial bank, Malawi Savings Bank (MSB, formally the Postal Bank); one nonbank government-owned financial intermediary, Malawi Rural Finance Corporation (MRFC); one government program Malawi Rural Development Fund (MARDF) which received funding from the Government through the MSB; and two government trusts,


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Small Enterprise Development Organization of Malawi (SEDOM) and Development of Malawi Trader’s Trust (DEMAT), which served small and medium enterprises. In addition, the Government had a majority shareholding of the largest commercial bank in Malawi, the National Bank of Malawi through the Government-run trust, Press Trust. Thus, the Government’s legislative reforms for the financial sector, its request for the FSAP, and then development of a comprehensive program based on the FSAP’s recommendations highlighted its continued interest and strong commitment in advancing the financial sector agenda.

B. KEY FACTORS DURING IMPLEMENTATION

Positive

58. Since effectiveness, the implementing departments had been enthusiastic in implementing their activities. Among these, notable departments included the National Payment System, Bank Supervisions, Pensions and Insurance, Microfinance and Capital Markets, Public Enterprise Reform and Monitoring Unit, FSPU, and Accountant General’s Department. This was a clear demonstration of sense of commitment and ownership. Furthermore, during the MTR exercise, the MOF and RBM reaffirmed their commitment to the project and fully appreciated the benefit of the new delivery channels for financial deepening and the development of financial markets in Malawi.

59. As the PIU was deemed an independent unit in the RBM with its own budget, bureaucratic intervention was minimal, and efficiency of implementation was higher.

Negative

60. Project implementation of the financial infrastructure initiatives was delayed by about two years were mainly associated to: i) the long tender processes of hiring consultants and finalizing the business case and technical designs of technology solutions; ii) the longer than expected process to obtain stakeholder buy-in and sign-off on evaluation reports for contracts and the architecture and technical design of infrastructure initiatives, and; iii) identified additional works on the initial technical designs or market approach when procuring technology solutions. As a result, implementation of the National Switch, ATS/CSD, and MFI Hub was delayed. At the completion of the project, because of the delay in building the MFI technology Hub, an exit strategy for the shared platform was not fully prepared. This would have helped in securing operating resources and operational sustainability even though the establishment and composition of an independent management board for the MFI Technology Hub Company was completed. Other areas impacted include non-production of material for insurance sensitization campaigns because of delays to arrive at common positions of the future design of the campaigns, through a participatory and inclusive process.

61. Implementation was also delayed in the initial stages because of the PIU staff’s lack of knowledge on the World Bank’s procurement procedures. It is important to underline that this was the first time that RBM had implemented a World Bank project. The PIU was a hybrid of RBM staff and consultants. Overall, the turnover in the PIU was not any different from any other project in the World Bank Malawi country portfolio. The labor market in Malawi is small and there is a tendency for project staff to move from project to another even though remuneration of PIU staff was always reviewed by World Bank fiduciary teams.


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62. Identifying appropriate consultants was challenging even though the hiring process began early with support of the project preparation facility. Sometimes the PIU even had to re-advertise as it did not get the right candidates after the first advertisement, and at times they even had to opt for international recruitment. Likewise, delays in the identification of vendors also affected implementation.

63. High turnover of staff because of transfers and resignations at the PIU, MOF, and RBM affected the implementation of certain activities. For example, staff attrition through transfers at the FSPU in the MOF and understaffing in the Consumer Protection and Financial Literacy (CPFL) Unit in the RBM due to significant delays in recruiting additional staff affected implementation. Two procurement specialists and two FM specialists resigned from the PIU during the project implementation, which affected continuity and processing of activities.

64. The FSDT did not materialize because the U.K. Department for International Development (DFID), involved in establishing the Trust, pulled out of the project because of internal policy changes and general public finance management concerns in Malawi.

65. On the World Bank’s side, the project has three TTLs throughout is life. However, the turnover of project TTLs was within norms of other projects in the portfolio that were approved at the same time (e.g. energy and mining projects). A special emphasis goes to having in-country support to the PIU teams and beneficiary institutions. The regular supervision missions, meetings and technical guidance helped a lot to reach the project purpose. Changes in TTLs was undertaken carefully by the World Bank and field supervision were carried out with adequate skills mix at critical project implementation periods to address problems identified. It is worth noting that the turnover in TLLs caused anxieties for the client even though this did not disrupt implementation.

IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME

A. QUALITY OF MONITORING AND EVALUATION (M&E)

M&E Design

66. The monitoring system was based on key performance indicators and intermediate outcome indicators, as included in Annex 1 of the PAD. Additional changes in the Results Framework were later introduced through project restructurings to augment results monitoring to make them more realistic. New indicators were also added to monitor the financial sector and the women project beneficiaries. The PIU at the RBM was the responsible implementing agency for conducting M&E activities which regularly collected data and provided detailed reports for the overall M&E system with inputs from the designated focal points in the implementing units. These units were responsible for data collection and reporting for their respective component.

M&E Implementation

67. The project was subjected to 11 implementation support/supervision missions.7 The progress and guidance was recorded in the Implementation Status and Results Reports (ISRs) and the Aide Memoires. The task team regularly collected detailed progress data, updated current progress against the baseline,

7 See annex 6 for details (dates visited and so on).


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and highlighted issues for the World Bank management and donor’s attention. Information provided included quarterly progress and financial management reports and annual audits of project accounts. The MTR took place during November/December 2014. During the period preceding the MTR, the effectiveness of the consumer awareness programs under Component 3—Financial Consumer Protection and Financial Literacy—aiming to improve trust in the financial system and increase the usage of financial services was tested using FinScope surveys, which among other things, compared the change disaggregated by gender.

M&E Utilization

68. Appropriate data collected from the progress reports, including the MTR report, were evaluated and used to inform decision makers on certain activities. For example, restructurings and closing date extensions were based on inputs from the M&E and mission findings.

Justification of Overall Rating of Quality of M&E

69. The overall quality of M&E is considered Modest. Even though the M&E design was flexible and enabled the task team to restructure the project and adjust indicators, including target values, during implementation some of the performance indicators did not follow the logical chain. In the same vain, some performance indicators such as increase in the proportion of women within the adult population that is formally banked were impacted by factors beyond the project alone. Creating financial access to women requires specific actions to improve supply and demand of financial products. Nonetheless, timely M&E reports were prepared which kept track of project status at any given time.

B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE

70. Environmental and social safeguards compliance. The project was classified under category C, as it did not involve any activities that affected environmental or social safeguards.

71. Fiduciary compliance. The project complied with all fiduciary requirements during implementation. Internal control arrangements were in place and adequate FM, procurement, and disbursement systems were maintained.

72. Financial management. The project management team within the RBM effectively complied with the Financing Agreement covenants. The quarterly interim financial reports (IFRs) and the annual audited financial statements were submitted on time for the World Bank’s consideration. The reports were acceptable to the World Bank in form and content. The FM arrangements facilitated smooth implementation of the project as required, including funds flow and reporting. The FM arrangements were rated Satisfactory throughout the implementation period and all audited financial statements had unmodified (clean) audit opinions. Nevertheless, there were disbursement delays in resolving matters related to the IFRs. For example, it took more than two months to correct wrongly uploaded figures in the World Bank’s Client Connection, where the World Bank mistakenly uploaded ‘balances’ instead of ‘expenditure’ figures, resulting in balances on the project’s books not matching those in Client Connection.

73. Procurement. The project generally followed the procurement procedures stipulated in the Procurement Guidelines, PAD, Financing Agreement, and Project Implementation Manual. During


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implementation, no cases of ‘mis-procurement’ or unresolved complaints from bidders were recorded. Record keeping was excellent, and the project consistently used Systematic Tracking of Exchanges in Procurement (STEP) to plan, monitor, and track procurement even before STEP became mandatory in July 2017. There was also a slow start on implementation due to insufficient staffing levels at the beginning of the project and significant turnover of fiduciary staff. There were also delays in recruitment of replacements. Recruitment of procurement assistants also took time. All these delays led to extension of the project closing date.

C. BANK PERFORMANCE

Quality at Entry

74. The overall quality of the World Bank’s performance in ensuring quality at entry was Moderately Satisfactory. During preparation, the World Bank considered relevant aspects of the project, including technical, financial, economic, institutional, and procurement. Major risk factors and lessons learned from earlier projects were incorporated into the design. The project was well grounded on the realities of Malawi and its problems in the financial sector. However, there were shortcomings in the M&E Framework which were later improved during restructuring to better measure the PDO through the upgrading of some intermediate outcome indicators and introduction of new PDO-level indicators. A number of new intermediate-level indicators were also introduced.

75. An experienced and committed task team, which included the local country office staff, was constituted to provide technical support to the project. This was critically important, given the challenging business environment and the implications on implementation and monitoring of innovative activities.

Quality of Supervision

76. The quality of supervision is considered Moderately Satisfactory. From identification to around seven years of implementation, three TTLs managed the project, including one co-TTL based in the local country office, who followed up issues with the TTL and other specialists at the World Bank and did frequent checks on implementation progress. The World Bank’s full team included the TTL, technical experts, FM and procurement specialists, and consultants who consistently engaged closely with the counterparts. The task team responded appropriately and timely to all reasonable requests of the Government of Malawi (GoM). The World Bank’s technical and fiduciary teams provided regular support to focus on maximizing the project’s development impact, which resulted in adjustments, including project restructurings and extensions of the closing dates. With the inclusion of revised indicators, the task team used adequate resources, including technical experts with sectoral expertise. The task team conducted regular supervision missions, on average twice a year, to take stock of progress. The ISRs were candid, detailed, and well targeted, outlining important events and providing a clear and complete picture of the progress. The supervision team also produced clear and detailed Aide Memoires. However, the supervision missions could have done more to focus on advising the PIU teams and beneficiary institutions on assessing the efficiency of innovations carried by the project and proactivity in preparing exist strategies for the shared platforms.


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Justification of Overall Rating of Bank Performance

77. Based on the Moderately Satisfactory ratings for both, the Quality at Entry and Quality of Supervision, the overall rating of the Bank’s Performance is considered Moderately Satisfactory. Halfway into the implementation, the overall pace of the project’s key activities remained behind schedule with partial progress achieved in its PDO.

D. RISK TO DEVELOPMENT OUTCOME

78. The risk to development outcome is moderate in light of the following factors:

• The Government is fully committed to sustain the project’s achievements. The current management of the RBM is also committed to the project, especially on financial literacy and consumer protection. It is worth noting that the Government has requested for a successor World Bank project to FSTAP to enhance private enterprise growth and job creation in Malawi by increasing MSME access to financial services and improving their capabilities.

• FSTAP laid down sophisticated infrastructure such as the National Switch and the MFI Hub which the new project will leverage to increase financial institutions capability to improve financial products and innovate, as well as building the capacity of stakeholders and end-users to encourage financial product uptake. Integration of the National ID system into these systems is also key going forward.

• While financial sustainability of operations of the MFI Hub remains tenuous it is increasingly being secured as the number of MFIs and SACCOs joining keeps growing. The institution built and handed to beneficiaries (MFI Hub Company Limited) is likely to run using existing policies as owners of the assets and the liabilities of the facilities provided. Beneficiary institutions are continuing to adopt the shared platform concept after project closure thereby expanding the support base for the sustainability of the MFI Hub. Although the achievements of the MFI Hub are positive and the social and economic impact are incommensurable, this innovation is not likely to be pursued if the unit costs for joining are high. Similarly, the MFI Hub innovation is not likely to be maintained if unit costs for being involved are high. Consequently, alternative financing already being considered by the authorities to enable more MFIs and SACCO to adopt the concept needs to be continued and this should also include commercial financing options. The successor project to FSTAP will also explore improvement to the MFI Hub that aim to facilitate greater access to finance for MSMEs and linkage to the Hub.

• The integration of mobile money services on the National Switch significantly expands the support base for the sustainability of the platform and confirms the market relevance of the technical solution. The use cases integrated include Person-to-Person (P2P), Bill Pay, Cash-pull from bank account, and Cash-push to bank account. The institution built and handed to beneficiaries (National Switch Limited) is likely to run using existing policies as owners of the assets and the liabilities of the facilities provided.


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• As the regulatory framework on the financial sector is in place, there is no risk regarding its sustainability. They are embedded in a well-established institution, the RBM. They will also benefit from the existing maintenance policy at the RBM for critical infrastructure and information systems. Likewise, the ATS is housed at the RBM with adequate financial resources; its sustainability is therefore ensured. This ATS as well as the legal and regulatory framework will need to be upgraded regularly to keep up with market and technological developments. The oversight of the financial market infrastructure handed to beneficiaries also needs to be established.

• On the other hand, adoption of new budgetary units under the institutions running the facilities provided by the project need to be treated with caution and managed carefully to secure the momentum on the project’s achievements.

V. LESSONS AND RECOMMENDATIONS

79. The project offers several important lessons, some specific to Malawi and others that are broader and generally applicable. These are summarized.

o Readiness for execution. For the success of a project such as the FSTAP, it is vital to provide high-quality technical studies to underpin key issues and considerations such as the business case for shared infrastructure and architectural design. Ensuring advance procurement of the technical consultants can also help expedite progress on activities that entail support for financial market infrastructure.

o Reinforcing ownership through end-user involvement throughout project lifecycle. Projects such as FSTAP with a significant focus on financial market infrastructure can benefit from creating and sustaining a “shared platform”, a mechanism promoting understanding and offering practical guidance on identifying and avoiding pitfalls and maximizing payoffs. The shared platform can act as a home for the project or serve as an initiative that is unincorporated and does not have its own legal status but provides administrative support and oversight and financial responsibility for all activities of the project. These project responsibilities are additional to the PIU team’s day-to-day programs and responsibilities. The provision of a shared platform is therefore an intentional decision to extend and reinforce ownership of the technical solution by end-users and other stakeholders.

o The shared platform could support collaboration, leadership, governance and project development, providing the opportunity for the testing of new ideas. RBM working together with the PIU facilitated stakeholder consultation and engagement on all activities on financial market infrastructure and ensured that stakeholder engagement was infused into the project throughout its lifecycle as an iterative process. The goal was to gather views of key stakeholders and arrive at common positions of the future design of the technical solutions, through a participatory and inclusive process.

o In this context, a mapping and identification of stakeholders should be undertaken to obtain a complete picture of key sector players in the early stages of the project. Information systems supplied should only be certified completely delivered only after installation and satisfactory test running and training involving end-users. An exit strategy for the shared platform could be


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incorporation or formalization as a not-for-profit or commercial entity thereby increasing the opportunity for self-financing or alternative commercial financing.

Facilitating stakeholder consultation, coordination, collaboration and their buy-in

With the support of project technical consultants and the PIU team, the Reserve Bank of Malawi (RBM) was able to convene a ser

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